We all know that home prices have increased on average of +5% over the last few years. And we all know that annual average earnings growth has remained at -3%. How long is this disparity going to continue?
According to 45 property market analysts polled by Reuters in its annual snapshot of the economy, home prices are expected to rise two times faster than wage growth and inflation. Let’s break this down a little.
Currently, home prices are expected to gain an additional +5.7% this year. The 45 property market analysts anticipate that home prices will increase +4.3% in 2019 and +3.6% in 2020. Clearly, “we are not seeing a temporary phenomenon,” said Sal Goatieri, an economist with BMO Financial Group.
Meanwhile, these market analysts anticipate earnings growth of 2.8% and inflation growth of 2.5% in 2018. “House prices have been outrunning family incomes for several years in the US,” said Goatieri. When asked about rate affordability on the scale of 1 – 10 with 1 being “no” and 10 being “yes,” Goatieri answered, “7.”
Trump’s tariffs, announced after this Reuters Poll was taken, on Canadian lumber, steel and aluminum have exacerbated the affordability issue. These tariffs, and any others that may follow, could contribute to the rising costs-lack of affordability problems because the businesses and builders needed to build new housing will simply pass along these “new” rising costs to consumers.
According to Random Lengths, a publication that covers the lumber market, the cost of 1,000 board feet of Western Canadian lumber has gone up almost 80% within the past 12 months, including approximately +40% just this year.
These increased supply costs, increased skilled labor costs and supply shortages of Canadian lumber due to disease are the three dominant reasons that monthly starts of new residential construction stand at 1.24M units, much below the 1.94M unit averages from 2003-2005.
Jerry Howard, CEO of the National Association of Home Builders, said, “We are trying to sound the alarm…” in Washington. Is anyone listening?
And, by the way, is anyone sounding the alarms on stagnant wage growth and rising inflation? My optimistic self says that those alarms will be sounding very soon. But, will anyone be listening?